Fruit of the Loom In a Sticky Situation

The rot in the fruit basket continued as underwear maker Fruit of the Loom(NYSE: FTL) rounded off a disappointing first half by saying after the bell that it expects full-year earnings to come in "significantly below analysts' expectations." Seven analysts surveyed by First Call were looking for a loss of $0.03 per share.

"The company has made substantial progress over the last 18 months in the areas of merchandising, new product development, and product quality," said Chairman William Farley, but, "our success in these areas has been overshadowed by continued production and customer service difficulties."

Production disruptions in the first quarter hurt Q2 results. Last year's winter was unexpectedly warm and the company was slow to get back on track. It couldn't make enough activewear to meet demand, and revenues and gross margins suffered. On somewhat more encouraging news, Farley reported continued strong demand for the company's retail and activewear products.

Longtime fruitbearers are probably wondering why we didn't refer to Farley as Chairman, CEO, President, and COO Bill Farley. Turns out continued strong demand for the company's retail and activewear products wasn't enough to keep him wearing all those shoes, as Farley -- also chairman of Acme Boot Co. -- is giving all of them up except for the chairman's loafers.

Farley became CEO and chairman in 1985, adding COO and president in January 1998. Now director Dennis Bookshester steps in as interim CEO while the company looks to fill the shoes Farley left behind.

Investors didn't take the news too badly this morning, the stock down about $1/4 as of this writing. That might be an indication that the earnings warning wasn't particularly surprising; it may also be homage to Fruit of the Loom's brand, distinctive advertising, and reputation with consumers (or what is left of it after consumers couldn't get the stuff they wanted).

But how much should that mean to investors considering a company -- laden in debt and lacking in leadership -- that hasn't been able to capitalize on the equity built into its name?

It's not a pretty picture at the moment, and the near-term outlook doesn't look much better. Investors with a firm belief that the company can begin generating returns for shareholders might want to start looking more closely, though, with the shares trading for less than five times projected full-year 2000 earnings.

Management, however, hasn't given any indication of when the company will be able to put the aforementioned operating ills behind it. In the absence of signs of progress from the land that underwear built, projected profits may be a pipe dream.